The "new normal" means saying goodbye to double-digit returns, as leverage and deregulation are "fading from the horizon and their polar opposites are in the ascendant," Bill Gross, managing director at Pimco, wrote Wednesday in his October investment outlook.
CNBC.com
Bill Gross
On Tuesday, Gross told CNBC that he expects the Fed to begin another round of easing soon, which he called "a last gasp."
In his investment outlook, Gross wrote that future investment returns will be "far lower" than the historical averages and a less levered hedge fund community, faced with lower yielding assets, will likely resign itself to "a high single-digit future."
"Some characterize it in biblical terms – seven fat years to be followed by seven years of lean," he wrote.
Bond yields are "anemic" because of low expectations for gross domestic product growth and inflation in developed economies, Gross wrote.
"Even the wildest bulls on Wall Street and worldwide bourses would be hard-pressed to manufacture 12 percent equity returns from nominal GDP growth of 2 to 3 percent," he added.
In the "old normal," prosperity was driven by rapidly rising asset prices, which in turn were driven by debt and were correlated to interest rates, but now with the world deleveraging, a new foundation for prosperity is needed, he wrote.
The best foundation would be "good old-fashioned investment in production," but this would take a long time and an increase in political courage, according to Gross.
More likely, policymakers will resort to more quantitative easing and "near double-digit deficits as a percentage of GDP from Washington," he wrote.
The hope is that the private sector will spend the money that is printed faster than required to generate investment and consumption. But financial markets are now doubting that recipe, in a situation reminiscent to Japan's lost decades, he wrote.
"Investors will likely not know whether the mouse has grabbed for the cheese for several years forward," Gross wrote.
Until then, "they are faced with 2.5 percent yielding bonds and stocks staring straight into normal real growth rates of 2 percent or less," he added.